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jackalope

What's The Story With Io Mortgages?

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Is there ever a sane, financial reason for getting one? I was talking to a friend last week and he said he was going to but a new, bigger house through 'the magic of the interest only mortgage'.

Is this financial suicide?

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Is there ever a sane, financial reason for getting one? I was talking to a friend last week and he said he was going to but a new, bigger house through 'the magic of the interest only mortgage'.

Is this financial suicide?

Not necessarily - as long as you have an investment vehicle for paying of the capital loan and this shouldn't rely on house prices increasing because they may not.

Thre problem is when people stretch themselves to the limit with IO mortgage and do not have a seperate investment vehicle.

The other problem is that you are paying interest on the full capital loan for the length of the mortgage (is this right?).

Personally i would have thought it worked out cheaper in the long run to be reducing the capital loan as fast as possible.

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Is there ever a sane, financial reason for getting one? I was talking to a friend last week and he said he was going to but a new, bigger house through 'the magic of the interest only mortgage'.

Interst ony. mortgages are not magic - you only

pay the interest, effectively renting from the bank.

The 'magic' lies in capital appreciation, and the ability to realise the gain

to pay down the principal. All in all a big gamble, based on betting

on yesterdays winner.

It makes financial sense only when it is a repayment mortgage,

and that the amonut borrowed can be paid off with less than

a lifetimes wages.

Is this financial suicide?

Right now , yes.

ABB

Edited by AgeingBabyBoomer

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Thre problem is when people stretch themselves to the limit with IO mortgage and do not have a seperate investment vehicle.

This is almost certainly this case in this instance. The reason he's going for the IO is that he can't afford a normal mortgage on the house he wants therefore no cash available for another investment!

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Is there ever a sane, financial reason for getting one? I was talking to a friend last week and he said he was going to but a new, bigger house through 'the magic of the interest only mortgage'.

Is this financial suicide?

Why buy on an interest only mortgage? He will need a deposit (that will no longer earn credit interest). Or if buying bigger is putting his equity at risk, Interest only is a high risk investment, and any bank or building society who lends without a repayment vehicle is not a responsible lender IMO.

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Interest only mortgage is only suitable (for those buying to live in) if your repayment vehichle will outperform the interest you pay on your mortgage. Obviously, you cannot guarantee your investment will out perform the mortgage rate, so you need to take risk into account.

E.g. if you had a fixed mortgage and interest rates shot up, so you would get a better net return on your cash in a bank.

Edited by Jason

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This is almost certainly this case in this instance. The reason he's going for the IO is that he can't afford a normal mortgage on the house he wants therefore no cash available for another investment!

Then he is playing a very dangerous game. He is leaving himself no 'wriggle room' for changes to his circumstances. He is also saddling himself with a debt larger than he can comfortably afford.

If he can't afford a normal mortgage on the house he wants then he can't afford the house.

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Is there ever a sane, financial reason for getting one? I was talking to a friend last week and he said he was going to but a new, bigger house through 'the magic of the interest only mortgage'.

Is this financial suicide?

Remember those Endowment Mortgages from the 1980's that people are struggling with now? (and all thoses "court claims" on offer?)

Interest only works in the same fashion, only the difference between Endowment & Interest-Only is that with IO, no plan is made to repay the capital!

Should make for some interesting headlines in the 2020's :ph34r:

Edited by A Fool & His Borrowed Money

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I shold think a good number of those who bought using IO over the last few years will begin to relailse the nature of their situation.

Every year, year after year the payers of those mortgages will look at their annual statements and realise quite what they have done - continually paying full whack year after year with no reduction in debt level.

Better hope for a lot of wage inflation.

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I am wondering how many of these people actually know they are on IO are what it is.

Now don't get me wrong I am sure a lot know exactly what they are doing but some of these companies just tell them what the monthly payments will be and sign them up.

I too can see a repeat of the endowment fiasco in twenty years time.

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An interest-only mortgage on #380K would cost #1,500 or so a month: a repayment one would be #2,100.

Given that (I believe) it takes 3 years before you start paying off even slightly significant chunks of the capital, what if we were to put #600 away each month, and, as soon as possible, use the capital arising, to pay off the capital?

We would also use the savings on the mortgage interest to add to the 'repayment pot, ie would always pay #2,100 either in interest or 'pot'. Can anyone tell me if this would save money - obviously assuming we have the self-discipline to keep the 'pot' going, and that a lender would allow us to pay off in this way...

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One advantage that the landlord has over the owner occupier is that they don't have to get a repayment vehicle. Whereas an owner occupier has to pay off the mortgage by the time they retire a landlord only has to see the rent coming in. Thus affordability for the landlord - at least initially - is higher.

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I know of someone aged about 40 who's buying a property in Fulham (new build) costing GBP 1.1m, with equity of 500K, and an interest-only mortage of 600K. He says it's the only way he can afford it! He's not expecting to pay off the loan, he's just expecting to pay it off when he sells. I don't think he's considered the possibility of a fall in its value!

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An interest-only mortgage on #380K would cost #1,500 or so a month: a repayment one would be #2,100.

Given that (I believe) it takes 3 years before you start paying off even slightly significant chunks of the capital, what if we were to put #600 away each month, and, as soon as possible, use the capital arising, to pay off the capital?

We would also use the savings on the mortgage interest to add to the 'repayment pot, ie would always pay #2,100 either in interest or 'pot'. Can anyone tell me if this would save money - obviously assuming we have the self-discipline to keep the 'pot' going, and that a lender would allow us to pay off in this way...

using your example the interest part of the repayment mortage will be £1,500 meaning exactly the same £600 goes to pay the captial off rather that to a savings account.

Having a repayment mortage will normally be more money effiecent as it "saves" you the interest rate of the mortage (say 5% ) and doesn't get tax. where savings account are usually lower than mortage rates and get taxed requiring a savings account of 6.5% to match just paying of a mortage. Plus a repayment mortage forces you to pay it of, and there is no money sitting in a savings account temping you use it.

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IMO an IO loan can be the sensible option if you know that you only need the loan for a relatively short time, say one year, especially if you can find one with a good rate and no setup and redemption fees. Most repayment loans will have the interest loaded up into the first few years of payments, so your extra monthly payments during the first year or so don't usually buy you much equity.

It's well worth looking at the figures in this case, this option has worked out well for me in the past.

Edited by martinipaul

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If a graduate took out an IO mortgage it would allow him/her to afford a bigger house.

The graduate would hope to get high wage inflation in the next few years and could then remortgage for a repayment mortgage.

Not the most efficient method, but it does mean the graduate has the enjoyment of those extra years in the bigger house.

Not my cup of tea though...

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IO is good for -

people who think that house prices will rise quickly and are struggling with affordability so are pulling out the stops to get the property they want now. (not really apllicable now)

people who think their wages will rise so they can switch to repayment when their wages do rise (should be young people normally)

people who (think they) can outperform the interest rate on the mortgage with their chosen investment vehicle. traditionally an endowment, but why not go IO using the money saved to bet on horses / buy art / trade shares, whatever you can do that makes money at a better rate than the mortgage interest rate (risky but some people like risk!)

FF

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and those that took out an io mortgage out in 2002 have seen their repayments double with interest rate increases and the "nominal " value of their asset stay the same or decrease...whoop!!!... that makes financial sense..any one thinking of taking any mortgage out should be certain they can afford to cover at least 50% interest rate increases at some stage, over the next 5 years.

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and those that took out an io mortgage out in 2002 have seen their repayments double with interest rate increases and the "nominal " value of their asset stay the same or decrease...whoop!!!... that makes financial sense..any one thinking of taking any mortgage out should be certain they can afford to cover at least 50% interest rate increases at some stage, over the next 5 years.

If I had taken this advice in the mid nineties I would have stayed as a renter and would have missed the boat. whoop!!!

IRs were around 7.5% and NO WAY could I have afforded 11+% rates.

Instead I got a discounted variable rate mortgage with cashback and never looked back...

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IMHO - these horrible little IO schemes should be right up there with timeshare re-sellers.

IO is such a complicated vehicle it is not suitable for the likes of most buyers (including me!).

Dr Bubb is probably one of only a couple of people I can think of who could legitmatley make such a vehicle work effectively - i.e. He has a sound understanding of the product on offer. He understands interest and its compound effects. He could possibly (because one never knows whats going to happen!) make that money generate more money by releasing it to invest in other areas (gold, oil, pork bellies, uranium, shipping, stocks, shares, etc, etc,)....What he wouldnt do is use that extra line of funds to buy into the market that he has released those funds from!

Lets just stop for one moment and imagine what an IO mortage would look like at 7 or 8% ?

This isnt even going to the extreme of nearly 15% which happened not that many years ago!

You have cleared not one red cent from the intial capital so you dont have that 'sliding scale' where each month you're chipping away at the capital and thus covering your ass that little bit more every 4 weeks....with IO you are truly a sucker praying to the mighty God of luck that interest rates wont rise and the bubble wont burst and energy prices wont cripple us (Gazprom anyone?)...and ...and ...and

For me, theres just too much stacked against me for making a highly geared purchase.

My advice would be to pay down any and all debts as fast as possible....I am yet to see an investment that I would borrow money to buy into. I have risked my own money in several areas because the potential gains outweigh 'flate returns' from banks....I'd hate to borrow off my credit card at 29% and try and find an investement to cover it and pay me a return!

For me, property is now a very lonnnngggg bet, I've got what I'm going to keep ....I have taken my money and time elswhere as the rewards are far higher.

When the tide turns, I'll be back....at 20% down and interest and capital repayment over 15 years on a commercial loan. If my figures stack up to that, I'll buy more.....thats a 50% correction at current prices.

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Thanks for some very informative replies. For clarification my friend is about 40 and never likely to earn significantly more than he does now. He has already MEWed (to pay off credit card debts) and so has next to no equity in his current house. I think if he does this and IRs go up significantly at any time in the future he'll be homeless and/or bankrupt.

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using your example the interest part of the repayment mortage will be £1,500 meaning exactly the same £600 goes to pay the captial off rather that to a savings account.

No - the #1,500 is the interest on a #380K loan - when, after say a year, I pay off 12 x #600, the interest that I pay in the following year will be a little bit less.

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IO is fine, most have the facility to repay capital each year when you have it. This is very helpfull in the early years for buyers as expensive enough furnishing the house and stuff. Of course you need the discipline to do this but thats up to the individual. Remember you repay very little capital on a repayment mortgage in the early years anyhow.

Edited by mercsl

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OK, I'm no expert on mortgages (one of the reasons I've found this sight so fascinating). One thing continues to puzzle me with the IO craze for personal mortgages (as opposed to BTL).

Ignoring all the pros and cons regarding amount of interest paid and monthly payment costs, if, as anecdotally sound quite likely, a lot of people are simply not putting money aside to pay off the capital they will always come unstuck at the end regardless if their property has shot up in value.

Say their house has doubled in value they sell it and pocket the difference - BUT they then have to find somewhere new to live with an amount equal to half their last property, so (presuming by now they're pretty near the end of their working lives) they're faced with moving somewhere smaller / lower quality. Surely that can't be what these people are intending to face after 25 years? Am I missing something?

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Say their house has doubled in value they sell it and pocket the difference - BUT they then have to find somewhere new to live with an amount equal to half their last property, so (presuming by now they're pretty near the end of their working lives) they're faced with moving somewhere smaller / lower quality. Surely that can't be what these people are intending to face after 25 years? Am I missing something?

This is kind of the baffled position I at which, I too, have arrived. It seems like such a bad idea in 99% of cases I am amazed they are so popular.

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  • 302 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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